{"id":1024600,"date":"2024-03-13T02:13:32","date_gmt":"2024-03-13T09:13:32","guid":{"rendered":"https:\/\/www.tradingheroes.com\/?p=1024600"},"modified":"2025-07-31T13:53:37","modified_gmt":"2025-07-31T20:53:37","slug":"types-trading-strategies","status":"publish","type":"post","link":"https:\/\/www.tradingheroes.com\/types-trading-strategies\/","title":{"rendered":"Most Traders Don\u2019t Realize There are Only TWO Types of Strategies"},"content":{"rendered":"<p><div class=\"post-aff-notice\">When you buy something through one of the links on our site, we may earn an affiliate commission.<\/div><\/p>\n<div align=\"center\"><iframe loading=\"lazy\" title=\"YouTube video player\" src=\"https:\/\/www.youtube.com\/embed\/cX5fwtnpKNs?si=njcbAuSyGQjU_FVZ\" width=\"840\" height=\"450\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/div>\n<p>&nbsp;<\/p>\n<p><strong>If you want to become a successful trader, it's important to understand the two primary types of trading strategies: discretionary and mechanical. Not understanding which one you are actually using can lead to unrealistic expectations, missed opportunities, and the belief that a strategy doesn't work, when it actually does.<\/strong><\/p>\n<p>I failed to understand how important this concept is when I started in 2007, so I want to save you a lot of time and frustration by helping you understand it right now.<\/p>\n<h3>Key Takeaways<\/h3>\n<ul>\n<li>There are two main categories of trading strategies: discretionary and mechanical.<\/li>\n<li>Both types of strategies work, but it's important to find the one that works best for you.<\/li>\n<li>Misunderstanding your trading strategy can lead to inaccurate expectations and underperformance.<\/li>\n<\/ul>\n<h2>The Importance of Understanding the 2 Primary Types of Trading Strategies<\/h2>\n<p><em>Knowing which type of trading strategy you are using is crucial for 4 simple reasons.<\/em><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-1024625\" src=\"https:\/\/www.tradingheroes.com\/wp-content\/uploads\/trading-chart-2.jpg\" alt=\"Trading chart\" width=\"1200\" height=\"753\" srcset=\"https:\/\/www.tradingheroes.com\/wp-content\/uploads\/trading-chart-2.jpg 1200w, https:\/\/www.tradingheroes.com\/wp-content\/uploads\/trading-chart-2-768x482.jpg 768w\" sizes=\"auto, (max-width: 1200px) 100vw, 1200px\" \/><\/p>\n<p><strong>First, you could be expecting results that are simply not possible with the type of strategy you're using.<\/strong><\/p>\n<p>For example, discretionary strategies cannot be traded 24\/7, like mechanical ones can.<\/p>\n<p>So they will have fewer opportunities to make money.<\/p>\n<p>A discretionary strategy might look fantastic in backtesting, but those results might not be possible in live trading.<\/p>\n<p><strong>Second, you could be limiting your returns by hanging on to a false understanding of the type of strategy you're using.<\/strong><\/p>\n<p>If you're trading a discretionary strategy and you treat it like a mechanical strategy, you might be limiting your creativity and blocking out your intuition, both of which could take your performance to the next level.<\/p>\n<p>On the other side of the coin, you might be introducing discretion into your mechanical strategy by turning the strategy on and off too often, thereby limiting the return.<\/p>\n<p><strong>Third, you may think that a strategy doesn't work when it does work if you adjusted your mindset.<\/strong><\/p>\n<p>You could backtest a mechanical strategy in one market and not be happy with the results.<\/p>\n<p>However, if you traded that strategy across multiple markets and timeframes, which is very possible with mechanical strategies, the return could be significant.<\/p>\n<p>That's just one example of how a small shift in your thinking can lead to big returns.<\/p>\n<p><strong>Finally, understanding the differences between the 2 types of strategies will prevent you from endlessly jumping to new strategies without properly evaluating the current strategy.\u00a0<\/strong><\/p>\n<p>When you know how each type works, you'll have a better idea of when to give up on a strategy and when to keep going.<\/p>\n<p>Giving up too early on a good strategy, and hanging on too long to a bad strategy, are both detrimental to your success.<\/p>\n<p>But many traders do it.<\/p>\n<p><em>I've done it before and it's something I want to help you avoid.\u00a0<\/em><\/p>\n<p>Now that you understand the benefits of this knowledge, let's jump into the definition of each type of strategy, and the pros and cons.<\/p>\n<h2>Discretionary Trading Strategies<\/h2>\n<p><strong>A discretionary strategy, also known as a subjective strategy, cannot be programmed into a computer and requires the trader to use their own judgment or skill to enter and exit trades.<\/strong><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-1024624\" src=\"https:\/\/www.tradingheroes.com\/wp-content\/uploads\/laptop-trader.jpg\" alt=\"Trader at laptop\" width=\"1200\" height=\"600\" srcset=\"https:\/\/www.tradingheroes.com\/wp-content\/uploads\/laptop-trader.jpg 1200w, https:\/\/www.tradingheroes.com\/wp-content\/uploads\/laptop-trader-768x384.jpg 768w\" sizes=\"auto, (max-width: 1200px) 100vw, 1200px\" \/><\/p>\n<p>This type of strategy involves the use of inputs like support and resistance, chart patterns, candlestick patterns, fundamental analysis, news, or any method that requires the trader to make a relative value comparison between two or more markets.<\/p>\n<p>With a discretionary strategy, you cannot expect the exact same results as someone else, as it requires input from the trader.<\/p>\n<p>Your skill needs to be improved through practice and experience.<\/p>\n<h3>Benefits of Discretionary Strategies<\/h3>\n<p>There are a lot of benefits to learning and developing discretionary strategies.<\/p>\n<p>Here are the best reasons to go this route.<\/p>\n<h4>More Flexible<\/h4>\n<p>Since discretionary strategies don't have rules that are set in stone, this allows more leeway in terms of how the guidelines of the strategy are applied.<\/p>\n<p>You can automatically adjust for different market conditions, based on your experience.<\/p>\n<p>Trading in this way can lead to more profit opportunities.<\/p>\n<h4>More Available Trading Strategies<\/h4>\n<p>There is a relatively small number of trading strategies that can be fully programmed into a computer.<\/p>\n<p><strong>So by going the discretionary route, you have more trading strategies available to you.\u00a0<\/strong><\/p>\n<p>You might find that exciting or overwhelming.<\/p>\n<p>I personally like to have more options.<\/p>\n<h4>Can Take Advantage of Unique Market Opportunties<\/h4>\n<p>There may be world events or regulatory changes that have no president, and therefore cannot be backtested or incorporated into a mechanical strategy.<\/p>\n<p>However, if you're aware, you can use your logic and previous experience to profit from the situation.<\/p>\n<p>This would not be possible with a mechanical strategy that has hard and fast rules.<\/p>\n<h3>Downsides of Discretionary Strategies<\/h3>\n<p>Like with everything else, this path does have its downsides.<\/p>\n<p>Here's what you need to know before you jump in.<\/p>\n<h4>Results Can Vary Widely Between Traders<\/h4>\n<p>Since there is so much trader input with discretionary strategies, backtesting and live results can vary a lot.<\/p>\n<p>Some traders may say that a strategy doesn't work, while others have fantastic success with it.<\/p>\n<p><strong>The key here is to find out what the successful traders are doing and emulate that.<\/strong><\/p>\n<p>So if someone says that a discretionary strategy doesn't work (or does work), be sure to test it for yourself and come to your own conclusion.<\/p>\n<h4>Backtesting Takes Longer<\/h4>\n<p>Every single discretionary trade requires trader input, so backtesting usually takes significantly longer than with mechanical strategies.<\/p>\n<p>This can be a benefit however, because you're able to see price action in more detail and can start to see patterns that you might otherwise not see with an automated backtest.<\/p>\n<p>You can also speed up the backtesting process by using partial automation.<\/p>\n<h4>Harder to Optimize<\/h4>\n<p>Since there are more variables with a discretionary strategy, they can be harder to optimize.<\/p>\n<p>You'll have to isolate each input individually and track its effect on your performance, which can be tricky.<\/p>\n<p>When optimizing a strategy, it helps to track your psychological state and stick to one set of rules.<\/p>\n<p>It can be easy to change the rules in the middle of a backtest or during live trading, but don't do it.<\/p>\n<p>That will only make it harder to isolate and improve your rules.<\/p>\n<h4>More Emotions Involved<\/h4>\n<p>Discretionary trading requires more inputs from the trader.<\/p>\n<p>So if you're having a bad day, or you aren't fully focused, then your results could be less than ideal.<\/p>\n<p>There are many ways to improve your trading mindset, but it requires a lot of awareness and practice.<\/p>\n<h2>Mechanical Trading Strategies<\/h2>\n<figure id=\"attachment_1024618\" aria-describedby=\"caption-attachment-1024618\" style=\"width: 1465px\" class=\"wp-caption alignnone\"><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-1024618 size-full\" src=\"https:\/\/www.tradingheroes.com\/wp-content\/uploads\/automated-trading-rules.jpg\" alt=\"Automated trading strategy\" width=\"1475\" height=\"653\" srcset=\"https:\/\/www.tradingheroes.com\/wp-content\/uploads\/automated-trading-rules.jpg 1475w, https:\/\/www.tradingheroes.com\/wp-content\/uploads\/automated-trading-rules-768x340.jpg 768w\" sizes=\"auto, (max-width: 1475px) 100vw, 1475px\" \/><figcaption id=\"caption-attachment-1024618\" class=\"wp-caption-text\">Automated trading strategy from <a href=\"https:\/\/www.tradingheroes.com\/naked-markets-software-review\/\" target=\"_blank\" rel=\"noopener\">NakedMarkets<\/a><\/figcaption><\/figure>\n<p><strong>A mechanical strategy, also known as a fully automated strategy, is a strategy that can be 100% programmed into a computer.<\/strong><\/p>\n<p>It involves a defined set of rules, and there almost no input from the trader after the development phase.<\/p>\n<p>Most trading strategies cannot be made mechanical, which can be frustrating.<\/p>\n<p>Additionally, mechanical trading strategies are not flexible and usually cannot change with evolving market conditions, unless there is a built-in learning capability.<\/p>\n<h3>Benefits of Mechanical Strategies<\/h3>\n<p>Mechanical strategies provide more structure to traders who like having a well defined set of rules.<\/p>\n<p>It's not for everyone, but here are the benefits.<\/p>\n<h4>Fast Backtesting<\/h4>\n<p>Mechanical strategies can be programmed into a computer, making it easier to backtest and optimize them.<\/p>\n<p>With just a few clicks, a strategy can be backtested over many markets and timeframes.<\/p>\n<p>Many trading strategies and markets can be <a href=\"https:\/\/www.tradingheroes.com\/how-to-backtest-a-trading-strategy\/\">verified<\/a> in just a couple of days.<\/p>\n<h4>Reproducible Results<\/h4>\n<p>Mechanical strategies can be reproduced between traders, unlike discretionary strategies which rely on an individual trader's skill and judgment.<\/p>\n<p>Therefore, traders can work together to develop strategies, which speeds up development.<\/p>\n<p>When groups of traders backtest discretionary strategies, the results can vary greatly, which can lead to a lot of doubt as to if the strategy works or not.<\/p>\n<h4>Easier Optimization<\/h4>\n<p>Since mechanical strategies are a well defined set of rules, they can be easily tweaked and tested for optimal performance.<\/p>\n<p>Many backtesting platforms like <a href=\"https:\/\/www.metatrader5.com\/en\" target=\"_blank\" rel=\"noopener\">MetaTrader<\/a>, <a href=\"https:\/\/www.tradingheroes.com\/discount\/forextester\" target=\"_blank\" rel=\"nofollow noopener\">Forex Tester<\/a> and <a href=\"https:\/\/www.tradingheroes.com\/nakedmarkets\" target=\"_blank\" rel=\"noopener\">Naked-Markets<\/a>\u00a0allow you to iteratively test settings like indicator values and position sizing, to find the best combination.<\/p>\n<p>Testing this manually would take a long time, but you can get results from an <a href=\"https:\/\/www.tradingheroes.com\/automated-bollinger-bands-strategy\/\" target=\"_blank\" rel=\"noopener\">automated backtest<\/a> in as little as a few minutes.<\/p>\n<h4>Automation Potential<\/h4>\n<p>Once a mechanical strategy is developed, it can be coded into a fully automated strategy for any trading platform that allows automated trading.<\/p>\n<p>All you need are the rules for the strategy and you can <a href=\"https:\/\/www.tradingheroes.com\/find-forex-trading-programmer\/\" target=\"_blank\" rel=\"noopener\">hire a programmer<\/a> to do the rest.<\/p>\n<p>Having an <a href=\"https:\/\/www.tradingheroes.com\/trading-bots-that-actually-work\/\" target=\"_blank\" rel=\"noopener\">automated trading strategy<\/a> will free up your time to develop new strategies, or do just go surfing.<\/p>\n<p><strong>Minimal Emotional Input<\/strong><\/p>\n<p>Mechanical strategies require minimal decision-making, reducing the impact of emotions on trading decisions.<\/p>\n<p>Usually the only decision that could involve emotions is the decision to turn the strategy off or on.<\/p>\n<p>This eliminates many trading decisions that can be impacted by the mood or psychology of the trader.<\/p>\n<h3>Downsides of Mechanical Strategies<\/h3>\n<p>Mechanical trading strategies have their advantages, but they also come with some downsides.<\/p>\n<p>Here are the downsides that you should be aware of.<\/p>\n<h4>Most Trading Strategies Cannot be Made Mechanical<\/h4>\n<p>It's important to understand that not all trading strategies can be programmed into a computer.<\/p>\n<p><em>In fact, most trading strategies cannot be made mechanical.<\/em><\/p>\n<p>This means that it can be frustrating to find those few strategies that do work, and it can take longer to find them.<\/p>\n<h4>Mechanical Trading Strategies are Not Flexible<\/h4>\n<p>Mechanical trading strategies cannot change with evolving market conditions.<\/p>\n<p>This means that if the market changes, your mechanical trading strategy may stop working, and you'll need to update the strategy or find a new one.<\/p>\n<p>There can be ways to create &#8220;AI&#8221; strategies that continually learn from new data, but that is a complex process to set up and monitor.<\/p>\n<h4>Emotions are Still Involved<\/h4>\n<p>While mechanical trading strategies are often touted as a way to eliminate emotions from trading, this is not entirely true.<\/p>\n<p><strong>There are still emotions involved with mechanical trading strategies, especially when your strategy is losing.<\/strong><\/p>\n<p>You may feel fear and be tempted to turn the strategy off, which can lead to missed opportunities.<\/p>\n<p>In my experience, the moment you turn an automated strategy off is usually when it starts to win again.<\/p>\n<p>That's not always the case obviously, but it sure feels that way.<\/p>\n<h2>Which Type of Trading Strategy is Better?<\/h2>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-1024616\" src=\"https:\/\/www.tradingheroes.com\/wp-content\/uploads\/2-types-2.jpg\" alt=\"The 2 Trading Strategy Types\" width=\"1920\" height=\"1080\" srcset=\"https:\/\/www.tradingheroes.com\/wp-content\/uploads\/2-types-2.jpg 1920w, https:\/\/www.tradingheroes.com\/wp-content\/uploads\/2-types-2-768x432.jpg 768w, https:\/\/www.tradingheroes.com\/wp-content\/uploads\/2-types-2-1536x864.jpg 1536w, https:\/\/www.tradingheroes.com\/wp-content\/uploads\/2-types-2-1280x720.jpg 1280w\" sizes=\"auto, (max-width: 1920px) 100vw, 1920px\" \/><\/p>\n<p><strong>Both discretionary and mechanical trading strategies work, but the key to success is finding the one that works best for YOU.<\/strong><\/p>\n<p>Some people can do both, but most people will gravitate to one or the other.<\/p>\n<p>With a discretionary trading strategy, you cannot expect the exact same results as someone else.<\/p>\n<p>You have to practice and improve your skills, and this will not happen just by learning a few rules.<\/p>\n<p>With a mechanical trading strategy, there are minimal emotions involved, but most trading strategies cannot be made mechanical.<\/p>\n<p><em>So there is no one best type for everyone.<\/em><\/p>\n<p>The key to success to figure out which one works best with your <a href=\"https:\/\/www.tradingheroes.com\/trader-personality-profile\/\" target=\"_blank\" rel=\"noopener\">trading personality<\/a> and avoid the following common misconceptions about trading strategies.<\/p>\n<h2>Common Misunderstandings With Trading Strategies<\/h2>\n<p><strong>Now that you understand the 2 types of strategies, this is the most important part.<\/strong><\/p>\n<p><em>Don't mix them up!\u00a0<\/em><\/p>\n<p>Here are some common misunderstandings that you should avoid.<\/p>\n<h3>Thinking a Discretionary Strategy is Mechanical<\/h3>\n<p>Many traders believe that their strategy is &#8220;rules-based&#8221; and therefore mechanical, when in fact, it requires their own judgment and skill to enter and exit trades.<\/p>\n<p>If you're trading a discretionary strategy and you think it's actually a mechanical one, you may give up too early on the strategy because you think the rules &#8220;don't work.&#8221;<\/p>\n<p>So take some time to figure out if your strategy really is mechanical or if it's discretionary.<\/p>\n<p>You'll have to backtest a discretionary strategy multiple times to get the hang of it, so don't get discouraged. You may also have to consult with successful traders using the strategy to get some pointers.<\/p>\n<p>It usually takes longer to learn a discretionary strategy, so don't give up too early.<\/p>\n<h3>Expecting the Same Results as Someone Else With a Discretionary Strategy<\/h3>\n<p>With a discretionary strategy, it's important to understand that you cannot expect the <em>exact<\/em> same results as someone else.<\/p>\n<p>This is because it requires the input of the trader and their own judgment and skill, which will vary from person to person.<\/p>\n<p><strong>So always test a discretionary strategy yourself, never take anyone's word that it works or doesn't work.\u00a0<\/strong><\/p>\n<h3>Hopping to New Strategies Without Proper Evaluation<\/h3>\n<p>Understanding the differences between discretionary and mechanical strategies can prevent you from continually hopping to new strategies without properly evaluating each strategy.<\/p>\n<p>I call this the <a href=\"https:\/\/www.tradingheroes.com\/trading-silodrome\/\" target=\"_blank\" rel=\"noopener\">Trading Silodrome,<\/a>\u00a0the perpetual cycle of jumping from strategy to strategy.<\/p>\n<p>When you know how each type of strategy works, you'll evaluate your strategies accordingly:<\/p>\n<ul>\n<li>With a discretionary strategy you'll give yourself a little more time to figure out the nuances of the strategy and if they can be optimized.<\/li>\n<li>With a mechanical strategy you'll test as many markets, timeframes and settings as possible, before you give up on it.<\/li>\n<\/ul>\n<p><em>If you do that, you'll know when to hold 'em and when to fold 'em.<\/em><\/p>\n<h2>Conclusion<\/h2>\n<p>On the surface, you may not think that understanding the difference between the 2 primary types of trading strategies is important.<\/p>\n<p><strong>But upon closer inspection, it's one of the most important things that you need to know about trading.\u00a0<\/strong><\/p>\n<p>Other trading strategy types like: trend following, price action and candlestick patterns are secondary types and are covered in deeper detail in other articles.<\/p>\n<p>If you want to learn more about secondary trading strategy types, check out the related articles below.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Find out what they are and why so many traders fail by not knowing this information. Get the benefits and downsides of each.<\/p>\n","protected":false},"author":2022,"featured_media":1024616,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[204239],"tags":[201657],"class_list":["post-1024600","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-trading-education","tag-trading-for-beginners","generate-columns","tablet-grid-50","mobile-grid-100","grid-parent","grid-33"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.1.1 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Most Traders Don\u2019t Realize There are Only TWO Types of Strategies - Trading Heroes<\/title>\n<meta name=\"description\" content=\"Find out what they are and why so many traders fail by not knowing this information. 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